Currency Pairs

In the Forex market, trades are made on currency pairs. However, to the person who is unfamiliar with Forex, the concept of currency pairs is as foreign as the currencies being traded. Basically, a currency pair is the relative value of one unit of a national/regional currency as weighed against one unit of currency from another nation/region. Before trading in Forex, it is essential to understand currency pairs in order to make a profit buying one while selling the other.

How Currency Pairs Are Listed
Obviously there are two currencies in a pair, one being the base currency and the other being the counter currency. The base currency is listed first in the pair with the counter currency listed second and this is how currency pairs are quoted. The base currency is the currency you are either buying or selling when you buy or sell a currency pair and the other (counter) currency is what you are going to look at fluctuations in so that you can make a profit as a Forex trader. This is just the tip of the iceberg when it comes to Forex trading, but without understanding how pairs are notated the rest will not fall into place.

Major Currency Pairs
One thing you will notice when trading in the Forex market is that all the major currency pairs have the United States dollar on one side of the pair. It will always be either the base or the counter currency. In all, there are seven major currency pairs which include:

  • EUR/USD
  • USD/JPY
  • GBP/USD
  • USD/CHF
  • USD/CAD
  • AUD/USD
  • NZD/USD

As you can see, the United States dollar (USD) is listed in every single one of those major pairs. The other countries listed in order are the Euro (EUR), Japanese yen (JPY), Great British pound (GBP), Swiss Franc (CHF), Canadian dollar (CAD), Australian dollar (AUD), and the New Zealand dollar (NZD). These pairs represent the largest and most stable economies in the world. Each of these pairs has a nickname which you might hear down the road, such as referring to the AUD/USD as the kiwi.

Cross Currency Pairs
Any pair that does not contain the USD is called a cross currency pair, for instance the EUR/GBP. Sometimes cross currency pairs are simply referred to as crosses and some of these have nicknames as well. An example of this would be any pair involving the Euro is often referred to as a Euro Cross. Although the majority of Forex trading involves the major pairs, there really is a good deal of money to be made in the crosses as well. In fact, some Forex traders prefer to watch the crosses simply because they sometimes fly under the radar. While everyone else is watching how the majors hold up against each other, there is significant movement in some more obscure currency which yields a higher profit because of a greater spread.

This is just a very basic understanding of currency pairs and how they are listed. Nonetheless, currency pairs are the essence of the Forex market and until you understand what they are there is no way to learn to profit from trading them. One thing to keep in mind is that Forex always, always deals in currency pairs which means that you are buying and selling simultaneously. You buy one while selling the other. There are a number of strategies which are commonly employed in Forex, the most common being the spread and as such a great place for the beginning trader to start because it further exemplifies the relative values between the currencies in the pair.

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